Current account deficit to GDP ratio seen to decline below 3 percent

A large current account deficit and double-digit inflation seem to continue to cause troubles for the Turkish economy. If global financing conditions become tighter in the period ahead—as widely expected—damage caused by high inflation and current account deficit will become even more troubling.

Comments by foreign analysts are increasingly focusing on the vulnerabilities of the Turkish economy, particularly on the current account deficit and inflation. Those analyses signal what the future holds for us. The latest reports by the rating companies clearly show how foreign analysts view Turkey.

If you ask what the government is doing in the face of all of this, all I can say is “officials are only making public statements.” Deputy Prime Minister Mehmet Şimşek, who has been making optimistic statements lately, took to Twitter over the weekend to send out similar messages.

The most striking comment he made was about the current account to national income ratio. He said “the current account shortfall would be permanently lowered to below 3 percent of the GDP.” It looks like GDP growth will come in at 7 percent, while the current account deficit will be 5 percent of the national income in 2017. Given those numbers, it is difficult to understand what it means to permanently lower the current account to GDP ratio to below 3 percent. Why did Şimşek need to make such a statement?

We have to ask a number of questions such as, “When? Would it be possible to achieve this ratio given the current production infrastructure in Turkey? What would be the growth rate if this ratio declines to 3 percent?”

Indeed, the ratio might decline to below 3 percent only if Turkey records negative growth rates. In a flurry of tweets, the minister suggested Turkey is likely to sustain strong growth this year, thanks to strong external demand and moderately strong consumption. He also said Turkey’s share in the global tourism market would increase above 3 percent, Turkey would rebuild the Middle East once the conflicts in the region are over, more foreigners would come to Turkey for health tourism, thanks to city hospitals and Turkey would reduce its dependency on imported energy.

More financial support

Among his comments, what stands out are his predictions about the current account deficit. I really do not understand why the minister has made such a statement. We can qualify his other comments as optimistic because we need to ask those questions. “Yes, the tourism industry is doing alright but what if something goes wrong? How much will the funding transferred to city hospitals raise the budget deficit?” And this is along with the expectation that global oil prices will continue to increase this year.

I am not quite sure if Minister Şimşek has made those comments because of warnings from international institutions regarding the current account deficit and inflation. I have to say, the increasingly over-optimistic tone in his statements do not help to change foreigners’ perception of the Turkish economy but only undermine his reputation.

While Şimşek has said all these, Winnekens, an official from Standard & Poor’s, told Bloomberg the issue of how the current account deficit would be financed would become even more complex if the central bank opts to tighten and external financing becomes scarce. Winnekens added that if the government increases financial support, they would consider this as a downside risk to the country’s credit rating. He simply said if the government increases financial support, the country’s rating could fall.

In summary, while foreigners are concerned that the current account deficit might increase, instead of explaining how the deficit would be financed, Şimşek has said the current account to national income ratio would be lowered to 3 percent.

This makes one question whether the next cabinet reshuffle will be very comprehensive.